Alpha and Beta Companies can borrow for a five-year term at the following rates: Alpha Beta Moody’s credit rating Aa Baa Fixed-rate borrowing cost 10.5% 12.0% Floating-rate borrowing cost LIBOR LIBOR + 1% a. Calculate the quality spread differential (QSD). b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed- rate debt. No swap bank is involved in this transaction. Assume the party, who pays floating- rate to his counterparty, needs to pay LIBOR

ABC Ltd can borrow from the market at a fixed rate for 5 years of 5% or floating rate at LIBOR + 0.1%. XYZ Ltd can borrow fixed for 5 years at 7% or floating rate at LIBOR+0.5%. Both companies decide to borrow from the market using their comparative pricing advantages and swap interest payments with each other. In the swap contract, XYZ agrees to pay ABC fixed at 5.5% and ABC agrees to pay LIBOR to XYZ. What is the net effective borrowing cost for XYZ after the swap? hint - draw a diagram to see the interest rates flowing to XYZ. Select one: a. 6% b. LIBOR-0.5% c. 5.5% d. LIBOR

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:   Fixed-RateBorrowing CostFloating-RateBorrowing CostCompany X10%LIBORCompany Y12%LIBOR + 1.5% A swap bank proposes the following interest only swap:X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent. What is the value of this swap to the swap bank?Group of answer choicesThe swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.none of the optionsThe swap bank will break even.The swap bank will lose money on the deal.

Company X operates in a retail industry funded 60% by debt, and Company Y also operates in the retail sector and is 80% financed by debt and has a beta of 0.7 Additional information The market return is 13%, and the debt of company X consists of . A bank loan of 8.5% interest per annum . 5-year GVN bonds are currently yielding at 7% . The tax rate is 28%Requireda) Determine suitable beta for company xb) Highlight the difference between systematic and unsystematic risk and the impact of beta on a company c) Calculate the cost of equity of the company xd) Calculate the weighted cost of the average of the company xe) If the company has an opportunity to invest in a project with an annual return of 13% p.a.Advise whether the company should accept the project or not?

Two firms ABC and XYZ have applied for 5 year term loans from your bank. You can fund only 1 proposal. Interest Coverage ratio and Debt service coverage ratio of ABC are 3 and 0.8 respectively. These ratios stand at 2.8 and 2 respectively for XYZ.  The banker will prefer None, because banker will seek more information about stock performance in the equity market to assess likely performnace over next 5 years XYZ, because it is better placed than ABC to meet ALL its repayment obligations for the current year ABC, because it has a higher interest coverage ratio

Companies X and Y have been offered the following rates per annum on a $5 million 10-year investment.Fixed rate Company X is 4% ；Floating rate Company X is BBSW；Fixed rate Company Y is 5% ；Floating rate Company Y is BBSW+2.5%. Company X requires a floating-rate investment. Company Y requires a fixed rate investment. Design a swap such that the dealer bank can receive a commission fee of 0.5% p.a., and the net gain is equally shared between the two companies. Please answer the following questions: (1) Identify the relative comparative advantages for each of the two companies. (2) Compute the net gains from the swap, and how much each company will receive. (3) Design the swap. You can either simply draw the swap plot or discuss the steps in words, to cover the following items. – What rates do each company invest at? – How do they exchange the interest payments with their counter-party? – What are their final investment returns?